Global central banks independence and the “Currency war”

Global central banks independence

Global central banks independence

Some of the major headlines in economical news over the last couple of weeks included statements by global economy officials regarding the “Currency war”:

The fear that central banks will divert their attention from maintaining price stability to a constant struggle for their country’s currency devaluation.

Some of the main points include:

  • The president of Germany’s central bank, which is known as an enthusiastic supporter of the central banks independence, mentioned that the erosion of the independence of central banks around the world could lead to a fierce competition of “who will have the weakest currency”, noting: “It is already possible to observe alarming infringements, for example in Hungary or Japan, where the new government is massively involving itself in the affairs of the central bank, is emphatically demanding an even more aggressive monetary policy and is threatening an end to central bank autonomy“.
  • ECB president, Mario Draghi, was asked earlier this month regarding the central banks trend to concentrate less on meeting the inflation target and more on policies which affect the exchange rate. He said that the exchange rate is very important “as far as growth and stability” but is not a policy target for the ECB. On top of that, Sir Mervyn King, England’s central bank president joined warnings against the “currency war” last week.
  • In the meanwhile, despite the warnings and in line with expectations, Japan increased its steps to weaken the yen, and plans to purchase European government bonds without setting a deadline. Also, the central bank set an inflation target of 2% (compared with a previous target of 1%). Japan’s deputy economy minister said that a rate of 100 Yen per Dollar wouldn’t be an issue for the Japanese economy, suggesting that the global criticizing will probably not convince Prime Minister Shinzo Abe to moderate his efforts to weaken the yen.
  • Mark Carney, president of the Bank of Canada, believes that “there continue to be monetary policy options in all the major economies“. Carney will be appointed to the Bank of England president in July, and his remarks might provide a glimpse of his views. Carney said that “within the framework of flexible inflation targeting that exists in most of the developed economies, there remains considerable flexibility”. He believes that governments must also take steps, in addition to central banks in order to “take all these risks out or set the seeds for a sustainable recovery”.
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